The Greenspan legacy

MORE than ten years have elapsed since Alan Greenspan stepped down from the Federal Reserve; a decade that has not been kind to his reputation. Having just read Sebastian Mallaby’s comprehensive biography*, “The Man Who Knew”, it struck me that his career was a classic example of cognitive dissonance.

The main post-crisis criticism of Mr Greenspan was that he was a naive believer in market efficiency, failing to pop bubbles in the late 1990s or mid-2000s and failing to regulate the financial sector properly. He was, for a while, a disciple of the libertarian novelist, Ayn Rand. But Mr Mallaby shows that things were rather more complex than that characterisation suggests.

In a paper written back in 1959, for example, Mr Greenspan clearly seemed to understand the detrimental effect that bubbles could have. He wrote that

The higher the stock market gets at its peak and hence the greater decline required to return to “normal”, the deeper the decline in economic activity

In 2002, after the Enron scandal, Greenspan also spoke in favour of greater regulation of corporate accounting standards. smacking the table, he told a meeting…